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    MBA Finance questions (CAPM, stock prices and more)

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    1) Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks:

    Expected Return Volatility Bets
    Green Leaf 12% 20% 1.5
    NatSam 10% 40% 1.8
    HanBel 9% 30% 0.75
    Rebecca Automobile 6% 35% 1.2

    a) At current market prices, which stocks represent buying opportunities?
    b) On which stocks should you put a sell order in?

    2) Why does the CAPM imply that investors should trade very rarely?

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    Solution Summary

    The description of stock price returns for expected markets are examined.